Is Income Inequality in Our World Today Increasing?

ABSTRACT

This paper is an analytical research that focuses on Income Inequality and seek to answer the question bordering on increasing or decreasing inequality in our world today. This paper has come about through detailed research on varying literature by eminent scholars and international thinktanks, on Inequality. The paper gives a brief introduction about Inequality, its history and evolutionary trends with a focus on in-country inequality and within-country inequality. The paper goes further to analyze the relationship between inequality and economic growth, zooming in on the stand of the Classical Economists as well as the Neoclassical Paradigm in relation to the impact of inequality on economic growth and consequently development. Also, a brief analysis of the in-country inequality, with a primary focus on China, India and United States. These countries represent 40% of the world’s population and serve as a good representative sample in analyzing global inequality. Furthermore, the paper reviews the impact of COVID-19 — a rear event that took over 2 million lives and is reported by Oxfam’s 2021 Report titled The Inequality Virus ‘as the first time since records began that inequality rose in virtually every country on Earth at the same time’ — on Income Inequality. Finally, the paper reviews the causes of inequality, implications of inequality and solution to inequality.

For the purpose of this paper, Income Inequality will be interchangeably used with Inequality or Global Inequality.

Keywords: Inequality, Income Inequality, Growth, Development, Population

*Prepared by Onike Anthony Onyekachi as an assignment for the course Global Economy: Emergence and Current Issues, towards an MA in Economic Policy in Global Markets at the Central European University, 2022.

INTRODUCTION

Inequality simply put is the rising gap between the rich and the poor, caused by unequal distribution of income and opportunities across the various strata of society. Inequality is a problem that mankind has always faced, but it rises and falls or decrease and increases at different stages in human history.

I shall not dwell much on the history of inequality, but a brief thought experiment will highlight how inequality has transformed over the last 50 years. This brief thought experiment is underscored by Gregory Mankiw, Defending the 1% (2013) and it envisages a true egalitarian society with perfect economic equality, one that would read a score of 0 on the Gini Coefficient, where there is equilibrium in demand and supply and everyone has the same level of income. A true utopia.

But this utopia is suddenly distorted by one entrepreneur — a Steve Jobs, a Stephen Speilberg or even a J.K. Rowlings — who invents a new product that everyone wants to buy, thereby taking little sums from everyone and giving it to this entrepreneur, consequently creating an immediate income disparity in this society. This new reality in this society raises a few questions, should policy makers resent this new system and deplore policies like taxation to redistribute the income? What will be the consequences of such policies on the entrepreneurial mindset and drive of the inventor? What will be the economic implication of such action or inaction?

The answers to this question are an innumerable myriad as there are innumerable economists in our world today, with different schools of thought and eminent scholars proffering different solutions. But ultimately, this goes to show the import role of government in tackling inequality, as buttressed by Gregory Mankiw, Defending the 1% (2013) “Rising inequality involves not just economics but a healthy dose of political philosophy”. The role of politics and by extension government in inequality is a vast topic as I shall not dwell on that in this paper.

The brief thought experiment highlighted above, is an extreme capture of what happened in the United States — and the world — society over the last several decades. This has led to an alarming increase in inequality, primarily caused by the exponential growth in the income of the top 1% of our world today. No doubt, these entrepreneurs have made significant impact on our world, but they go further to exploit the system, add little social value and further widen the gap. To buttress this, the Oxfam Report of 2019 reports that the global 1 percent controls 44.8 percent of the world’s wealth.

There is also a case for Absolute and Relative Income Inequality, as highlighted by the UNU World Institute for Development Economics Research that between 1975 and 2010 relative global income inequality decreased substantially as opposed to absolute income inequality that has increased.

Inequality and economic growth

Economists like Karl Marx and Adam Smith from the onset have been concerned about the effects of inequality — especially through capitalism for Karl Marx — and the unfair distribution of the factors of production.

Over the course of time, the conventional wisdom about the relationship between inequality and economic development has transformed. This point is clearly highlighted by Oded Galor in his paper titled Inequality and Economic Development, where he goes further to identify three bodies of economists; the classical economists, the neo-classical economists and the modern economists. These three groups held independent views about the impact of inequality on economic development. Firstly, the classical economists view inequality to be beneficial for economic development, while secondly the Neo-classical economists, after series of studies have concluded that the study of income distribution has no significant influence on the understanding of the growth process. But the modern economists have now promulgated with empirical evidence that income distribution actually has an impact on the growth process, as well as a negative impact arising from the widening gap in inequality.

Since it has been established that inequality is harmful to economic development, it is important for governments to take the wheel and steer their economies away from the ‘virus’ of inequality, as dubbed by Oxfam.

For according to the Parento ideology, which serves as a reminder about the unequal relationship between inputs and outputs we can ask like Gregory Mankiw (2013) did; If it were possible to make some people better off without making anyone worse-off, who would possibly object?

Country Analysis

These 3 countries were chosen as a sample to analyze the within-country inequality, because they have a combined share of 40% of the world’s population — 3.2 billion people — and portray a developed nation as well as a developing one.

China

The Chinese paramount ruler Deng Xiaoping, opened Chinas doors to the world in 1978 when he allowed foreign businesses to come in and operate in China, this was the genesis of China’s super power position today, hinged upon an unprecedented growth rate, fueled by indigenous production. The down side to this was that China was a seemingly egalitarian society in terms of its income distribution pattern before this time, but presently, China’s economy is fraught with a high degree of income inequality.

Before 1978, the Gini Coefficient for rural — urban inequality was 0.16. By 2002, the Gini Coefficient of China was 0.55. Today, it is put at 0.70. The Gini coefficient increase over the years is evident today, in the wide gap between the rich and the poor in China, that according to the Institute of Social Science Survey, 1% of Chinese population possess one-third of Chinese wealth.

The Chinese government must be commended though for taking bold steps to curb the inequality ‘virus’. In July 2020, the government announced that it had eradicated extreme poverty, at a humongous cost of over $800 billion. Thought challenged by some schools, the World Bank chief in China Martin Raiser, has said that “We’re pretty sure China’s eradication of absolute poverty in rural areas has been successful — given the resources mobilized, we are less sure it is sustainable or cost effective.’’ (Indermit Gill, Brookings Editorial, Future Development, 2021). There are other arguments also that China used a poverty line far less that what it should use, as an upper middle-income country. But the fact that the government is making concerted effort to curb inequality by reducing poverty is commendable.

India

With a population of over 1.3 billion people, inequality in India has been rising through the decades. According to (Oxfam International, India: Extreme Inequality in Numbers, 2021) ‘’ While India is one of the fastest growing economies in the world, it is also one of the most unequal countries. Inequality has been rising sharply for the last three decades. The rich are getting richer at a much faster pace while the poor are still struggling to earn a minimum wage and access quality education and healthcare services’’. India experienced a sharp decline in inequality post-independence but has returned over the last three decades to levels not seen since their colonial days.

Unemployment in India is the primary contributory factor for the income inequality. India’s unemployment rate has averaged 6% in the last decade according to the World Bank, which is an astounding 78 million people that are without paid employment. This widening gap and rising inequality are evidenced as the top 10% of India’s population holds 77% of the nation’s wealth. India had 9 billionaires in 2000, 101 billionaires in 2017 and 119 presently, and is estimated to produce 70 new millionaires every day. India has a Gini coefficient of 0.8 in 2021.

United States of America

America has a population of over 300million people. The U.S has the highest level of inequality among its post-industrialized pairs, with the Gini coefficient of U.S. presently is at 0.48, the highest level in the last 50 years. In 1990, the Gini coefficient was 0.43. There have been fluctuations in the Gini coefficient from 1915 when measurement began, but it has been relatively stable over the time.

The rising inequality is evidenced by CEO pay rise from around 40 times the average workers’ pay in the 1970s to over 350 times in the early 2000s (Wikipedia, Causes of Income Inequality in US, 2021). Also, Forbes published in 2017 that Jeff Bezos, Warren Buffet and Bill Gates alone held more wealth than the bottom half of the population.

COVID-19 and Inequality

According to World Bank’s Reversal of Fortunes, Poverty and Shared Prosperity 2020 report, the Gini coefficient increases about 1.5 points in the five years following major epidemics, such as H1N1 (2009), Ebola (2014), and Zika (2016). Therefore, based on historical facts and figures, the next 5 years after the Covid-19 pandemic, should increase the global inequality, unless we tackle it proactively. Already, the Oxfam’s, The Inequality Virus Report, 2021 has tagged the period of the pandemic as the first time in history since records began to be kept that inequality rose in virtually every country in the world at the same time.

Since the virus hit, the rich have gotten much richer and the poor have gotten poorer. Between 18th March 2020 and 31st December 2020, the wealth of Billionaires worldwide increased by an astounding $3.9 trillion. For example, during the COVID period, Mr. Ambani’s — Ambani Mukeshi, Reliance Group — average enrichment over just over four days was more than the combined annual salaries of the entire Reliance Industries workforce of 195,000 employees.

There is the need for government to therefore take extra measures to tackle inequality while it addresses the direct challenges of the COVID-19.

Causes of Inequality

Firstly, the race between education and technology according to Goldin and Katz (2012) argue that the increased demand for skilled labor in the technology industry, will itself increase the income gap between skilled and unskilled workers, because there’s less demand for unskilled labor in the technological sector, consequently leading to a rise in inequality. As Gregory Mankiw adds to this debate in his research work Defending the 1%, the cause of rising inequality is not primarily politics and rent-seeking, but rather demand and supply (of labor).

Secondly, technological changes have put control of resources in the hands of a few exceptionally talented and ivy-league trained individuals like CEO’s, Hedge Fund managers, Entertainment Superstars etc., in ways not possible decades ago.

Lastly, other causes of inequality revolve around low tax rates for people with higher incomes, executive compensation that is not commensurate with the pay increase of the average worker, amongst others.

Implication of Income Inequality

Income inequality and unfair resource distribution has a consequent negative effect on peace and order in society, according to Socrates. Furthermore, to worsen the possible lack of peace and order, it has a negative impact on economic growth, this is buttressed by Oded Galor (2009) where he writes that where inequality is perverse in a society, distributional conflict may arise and bias political decisions in favor of appropriation and may in turn diminish investment and economic growth.

This political bias can further affect the economy through slower GDP growth, increased individual debt and higher poverty rates.

Greater inequality will also lead to monopoly, a system that tends to exploit its workers to get as much as possible from them and pay as little as possible in compensation. This can lead to increased inequality.

CONCLUSION

The negative implications of inequality are generally agreed upon, but who is to blame and who bears the brunt for reducing the inequality; government, entrepreneurs (the super-rich), civil society? Other questions arise; what will be the implication of tax reforms that take more from the top 1% and redistributes it to the poor? Will it reduce the drive to be productive at the top? Will it increase the productivity of the poor?

David Landes writes that ‘’We are so rich and they are so poor, because we are so good and they are so bad i.e. we are hardworking, knowledgeable, educated and productive, and they are the reverse. We are so rich and they are so poor, because we are so bad and they are so good, i.e. we are greedy, exploitative, ruthless, aggressive while they are weak, innocent, virtuous, abused and vulnerable’’ (Gregory Mankiw, 2013). Whichever side of the coin you see it from, there is a need for government to enforce policies that ensure fair distribution of factors of production.

Finally, there’s the need to reduce the gap between the skilled and unskilled labor, by skilling up workers, as well as striking rich in a socially productive way.

References

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Gill, Indermit. “Deep-Sixing Poverty in China.” Brookings (blog), January 25, 2021. https://www.brookings.edu/blog/future-development/2021/01/25/deep-sixing-poverty-in-china/

“Gini Coefficient by Country 2021.” Accessed March 22, 2021. https://worldpopulationreview.com/country-rankings/gini-coefficient-by-country

“Income Inequality in China.” In Wikipedia, March 11, 2021. https://en.wikipedia.org/w/index.php?title=Income_inequality_in_China&oldid=1011544491

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Oxfam International. “India: Extreme Inequality in Numbers,” October 19, 2019. https://www.oxfam.org/en/india-extreme-inequality-numbers.

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Landes, David S. “Why Are We So Rich and They So Poor?” The American Economic Review 80, no. 2 (1990): 1–13.

Mankiw, N Gregory. “Defending the One Percent,” n.d., 19.

Niño‐Zarazúa, Miguel, Laurence Roope, and Finn Tarp. “Global Inequality: Relatively Lower, Absolutely Higher.” Review of Income and Wealth 63, no. 4 (2017): 661–84. https://doi.org/10.1111/roiw.12240.

“Population by Country (2021) — Worldometer.” Accessed March 22, 2021. https://www.worldometers.info/world-population/population-by-country/